Stock Order Types Essential Guide

Stock Order Types Essential Guide

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When trading stocks on a brokerage platform, there are a variety of stock order types you can use.

Some order types are executed immediately, while others can only be executed at a specific price or time.

It is therefore very important to familiarize yourself with the most popular types of stock orders and how you can put them to best use.

This beginner’s guide will give you a starting point and walk you through the basics of order types so you can know what is right for you and feel confident in placing a trade.

We will discuss the main types of trading orders and examine how day traders use them to improve their risk management strategies and trading efficiency.

All About Stock Orders

If you have traded stocks before, you may already have experience with various stock order types.

In financial markets, an order is an instruction that a trader gives to a stock broker or to a trading platform to buy or sell a particular security like stock, at a particular price or price range.

When you place a stock trade, you can lay out conditions on how your broker will execute the order, as well as time limitation and price restrictions on the execution of the order.

Main Order Types: Limit, Market, and Stop

Traders have access to a wide variety of order types that they can use in different combinations to make trades. However, the three main types of stock orders are:

Limit order

A limit order is one in which you request to buy or sell a stock at a limited price.

Traders place this type of order using a price at or above a specific price when selling a stock and at or below the prevailing market price when buying.

For example, if you want to buy stock in Apple at $110 a share, and the stock is currently trading at $120, then the broker would wait to acquire the shares until the price meets your limit.

Market Order

A market order when you request to buy or sell a stock at the current market price.

This order remains in effect only for the day, and normally results in the immediate purchase or sale of all the shares in question, provided market conditions permit and the stock is actively traded.

It is the most basic type of stock order. You buy or sell a security immediately, with no delay and at/close to its prevailing price.

If you are selling a stock, you will receive an amount close to the number displayed as “Bid.” Meanwhile, if you are buying, you will pay similar to the number shown as “Ask.”

Simply put, a market order guarantees that the broker will be execute the order instantaneously, but does not guarantee the execution price. 

This order type can be dangerous to use on highly volatile stocks because you could a fill price greatly different than what you are seeing quoted.

Stop (stop-loss)

A stop order, also known as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. Once the stop price is reached, a stop order becomes a market order.

Learning how to set up a stop order on a trading platform is crucial for most stock traders.

That is the surest way for traders to prevent huge losses when prices unexpectedly move in the wrong direction.

Why There Are Different Order Types

Brokerages offer a range of order types to give traders flexibility and to help them customize their trades and mitigate risk.

Trade orders are an important component of any trade because using the right one can help ensure that trades are executed at the intended price and in a timely manner.

Choosing the right type of order can also help you maximize your returns in the stock market.

Therefore, it is important that you know what each order entails so that you can benefit from the various features available to you.

How Orders Can Be Used For Different Situations

What kind of order a trader uses can make a huge difference in the price they pay and the profits they make. It helps to think of each order type as a discrete tool that is suited to its own purpose.

Whether selling or buying a stock, the most important thing is to identify your main goal.

Do you want to control the price of your trade? Are you looking to have your order filled quickly at the current market price?

You can then determine which order type is most suitable to achieve your goal.

Practice Order Entries In A Simulator

Dealing with the stock market is still always a bit of a gamble, regardless of ones level of proficiency with making investments and money management.

Therefore, it is crucial to learn how to make order entries in a simulator/paper-trading platforms before you start trading stocks with real money.

Although trading simulators is not the real thing, it can help you prepare for using live accounts.

Modern simulators provided by brokerage firms feel and look nearly identical to real trading platforms.

Simply open a demo trading account, choose a stock, try placing limit, market, and stop orders, and watch how it all plays out.

See how each order functions and how you will incorporate it into your trading strategy.

It is a good idea to execute a minimum of 50 trades in a simulator before trading with actual money to understand the mechanics of order entry.

You should never trade live until you learn how to place limit, market, and stop orders.

Simulators also provide additional features including stock charts, technical analysis tools, drawing tools, trade history, news feeds, and functionality for buying and selling stocks.

Credit: Warrior Trading

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